The US Dollar weakened in the middle of the trading week as all eyes will be on the Treasury auctions. The greenback has been strengthening this month following a lackluster February, buoyed by turmoil in the financial markets and soaring bonds. Can the buck continue its journey upward, or will it fall back to earth? Inflation and the Treasury market could be the deciding factors.

According to the Bureau of Labor Statistics (BLS), the annual inflation rate jumped to 1.7% in February, up from 1.4% in January. This matched market expectations. The annualized consumer price index (CPI) faced upward pressure from higher energy, medical care, housing, and food costs. But apparel prices tumbled 3.6%.

On a monthly basis, price inflation rose 0.4%, while the annual core inflation, which removes volatile food and energy, advanced 1.3%.

Federal Reserve Chair Jerome Powell recently reversed his position on inflation, warning that it could temporarily top 2% as the US economy continues to reopen. The head of the central bank noted that this would not force the Fed to taper its quantitative easing campaign or raise interest rates. Others at the Eccles Building have been sounding the inflation alarm for months.

In other economic data, mortgage applications slipped 1.3% in the week ending March 5, down from the 0.5% jump in the previous week, according to the Mortgage Bankers Association (MBA). The 30-year mortgage rate continued its upward movement, climbing 0.3% to 3.26%.the

Investors will be monitoring the bond market as the 10-year Treasury auction takes place on Wednesday. Treasurys have been rallying in recent weeks, with the benchmark 10-year yield surging from 1.1% to 1.5%, and some industry observers forecast it could surpass 2%. Analysts believe foreign demand will be significant, but they also assert that the pace of the increases matters a great deal more than the actual yields.

Guy Lebas, the chief fixed income strategist at Janney Capital Markets, told CNBC:

What matters is the pace of increases rather than the actual yields. We had a pretty rapid increase in yields at the end of February and early March, and that caused a lot of indigestion. When prices decline like they have, more demand steps in and slows the process.

A large part of U.S. Treasuries are owned by overseas entities, it’s roughly 40% of all Treasuries outstanding. Many of those buyers hedge currency risk, so what they care about is the after-hedge yield. Right now you are getting 1.5% on the 10-year, and you are getting 20 basis points on the currency hedge, so that’s 1.7%. That is a very attractive yield for foreign buyers. There is no place in the world where you can get 1.7% on a currency hedged basis.

Bonds are mostly in the red midweek: the 10-year Treasury fell 0.003% to 1.54%, the one-year bill was flat at 0.089%, and the 30-year bond shed 0.007% to 2.252%.

The US Dollar Index, which measures the greenback against a basket of currencies, hit the pause button on its rally in the middle of the trading week. The DXY slid 0.14% to 91.83, from an opening of 92.05. Year-to-date, the index is up 2.1%, beating most economists’ projections for a bearish performance.

The USD/CAD currency fell 0.11% to 1.2628, from an opening of 1.2638, at 13:33 GMT on Wednesday. The EUR/USD jumped 0.18% to 1.1923, from an opening of 1.1900.

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Post tags: Bonds, CPI, Dollar, DXY, EUR/USD, Federal Reserve, Inflation, Jerome Powell, Mortgage Applications, United States, US Dollar Index, USD/CAD

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